2020 broke many records for advisor M&A. As the pandemic continued to force rapid change and create uncertainty, M&A remained steady and strong throughout 2021. There were many positive changes, and some interesting trends that emerged, many of which will carry on into the coming year.

Advisors have long been guilty of doing for their clients but not for themselves in terms of planning and protecting their most valuable asset, their practice, from uncertainty. As an indiscriminate virus raged throughout society, many advisors were faced with the very real and immediate threat of illness or death. Prior to the pandemic, less than 18% of advisors had a continuity plan in place. Although we don’t have any clear numbers, we did see a rise in the demand for continuity planning services as the threat of the virus and the uncertainty of the markets continued into 2021. We also saw many broker-dealers and wirehouses pushing the continuity planning message and seeking insights and training from outside experts, like ourselves, to help educate their advisors on the process. Still, a vast majority of advisors, especially solo advisors, do not have a continuity plan in place.

Each year we do hundreds of practice valuations. 2021 marked a peak in practice valuations, with many averaging $2 million. The biggest factor impacting practice value was an improvement in practice management, particularly as it impacts profitability. Financial advisors have shifted to focus on better expense management, client segmentation, and multigenerational planning, all of which help drive practice efficiency and revenue. We have also seen a rise in the number of advisors seeking annual practice valuations, as they have learned it is a valuable tool for measuring and monitoring the performance of the practice from year to year.

Environmental pressures and an increased number of flexible lenders created opportunities for advisors to explore alternative deal structures and scenarios. Two options that gained tremendous popularity among sellers and buyers alike were “right sizing” and “sell and stay” practice sales. Solo advisors who wanted to scale back and focus on their best clients leveraged partial client group sales to “right size” their practice so they can continue to work on their own while cashing out equity when it is at its peak. This client group sales represented a balanced cross-section of their book, ensuring an attractive mix for prospective buyers. Other advisors sought opportunities to sell their practice to a younger advisor or larger firm while staying on board in a key position. This allowed advisors to maximize their return on equity and transition themselves to a role within the practice where they could work on legacy projects, like building COI relationships, transfer their knowledge to younger generations, focus on top tier clients, and help drive the strategic direction of the firm. Oftentimes, these advisors made arrangements to remain with the practice five to ten years after they sold. This is longer than the 1–2-year time frame of typical consulting arrangements made in “traditional” acquisitions. Access to capital continues to rise.

As the advisor industry proves itself as a viable investment and lenders learn to quantify the risk and rewards of lending, more capital partners have entered the space. Private equity firms as well as specialty lenders have emerged, giving both buyers and sellers more opportunities to pursue deals. Access to capital increased significantly for small and medium sized firms, allowing deals to happen at all levels. Access to capital has also helped drive up prices, with many firms selling at multiples of 2-3 times. It remained a seller’s market.

At the beginning of the pandemic many experts predicted a wave of aging advisors cashing out and moving to retirement. This wave has yet to crescendo, and buyers still far outnumber sellers. Even the threat of rising capital gains taxes didn’t push the predicted number of advisors to retirement. Many new buyers have entered the market, fueled by access to capital and increased education about M&A. “Fit” remains the key deciding factor, with sellers choosing buyers they like and can trust to take care of their clients. Overall, the advisor M&A market has continued to evolve and adapt to the many changes and challenges we’ve experienced during the pandemic. Advisors are choosing to work later in life but are also finding creative ways to cash out on the equity they have built while staying in the market. Access to capital is fueling deals across the industry, and empowering new buyers to enter the M&A game. We believe many factors will continue to put pressure on senior advisors and will we see more advisors considering their options, and most likely selling in 2022. We can’t say for certain at what point the market will shift from a seller’s to a buyer’s market, but we do see that shift on the horizon. Smart advisors will start looking at their options to monetize their practice equity now, and strike while practice values are at their peak, lest they find themselves on the wrong side of the supply and demand curve.